Walk Away or Keep Your House?

By  Paul Stevenson

These days a lot of homeowners and investors are asking the question "Should I walk away from my house?" Usually the house is underwater, and the owner is wondering whether it's a smart financial move to keep paying for an "asset" that may never again have positive equity.

The issues that typically arise when they ask this question concern liability, recourse vs non-recourse, credit rating, tax implications, moral responsibility, etc. However, the first question to answer is, "What do I want?"

Either you want to keep your house, or you want to get rid of it.

You may want to keep it if you live in the house and believe you can continue making payments on it. In addition, you may want to keep the house because you believe the economy and real estate market will turn around soon, and you don't want to throw in the towel on all the money you have already sunk into the property. Or you may just want to protect your credit rating at all costs.

On the flipside, you may want to get rid of the house if you are a long way underwater and it will take much longer than you are willing to wait before the property value will recover back to what you owe on it - let alone what you paid for it. Or you may have other economic difficulties, including job loss or a pay cut, that are making it very difficult for you to pay the mortgage and keep yourself in the house. Or you might own the house as a rental property and are having a hard time renting it, making for a negative cash flow that you cannot live with.

In many cases, underwater homeowners simply want to "get the monkey off their back" and be able to move forward with their lives without the constant worry and financial pressure of continuing to own the underwater property.

Each person has his or her own unique situation to contend with, but when it comes to deciding what to do about your underwater mortgage, it is necessary to decide fairly early in the process whether you want to keep the house or be rid of it.

The Inexact Science of Strategic Default

If you decide that you want to get rid of your house, then the "inexact science" of strategic default starts to come into play. When I was in this situation, I recognized that there were (and still are) millions of people in the same boat as me. With so many mortgages dramatically underwater, I hypothesized that the banks couldn't possibly be pursuing all defaulting borrowers for full payment and financial liability. i.e.,

If there were ever a time to get relief and dispose of underwater properties without being financially ruined, THIS IS IT.

If you agree with this thought, and if you also believe you are eventually going to reach the point of being either unable or unwilling to continue paying your mortgage, then the sooner you stop paying, the better.

Why? Because then less of your savings gets drained in the meantime.

Of course, my "sooner is better" reasoning ignores the fact that there could be a meteoric rebound in the home prices next month, or that the government could come up with a program specifically for people like you that will solve all your problems, or that you could win the lottery, or.....

Certainly, anything is possible in the future. But it is also possible that the real estate market could get worse, the economy could get worse, and things will not turn around for the next decade.

Personally, I do not have high hopes for a turnaround any time soon. You may have a different opinion, or you may live in a part of the country that is starting to see a recovery, which is why this issue is such a personal one. So start off by getting clear on what you want, and then go from there.

Paul Stevenson is an expert on strategic default and the creator of the Strategic Mortgage Default System www.strategicloandefault.com. This acclaimed program provides a clear, concise, and comprehensive analysis of the risks and rewards of strategic default, helping underwater homeowners and investors determine if strategic default is the right choice for their situation. Paul Stevenson's work is dedicated to teaching property owners "Everything you need to know BEFORE you stop paying your mortgage."


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